New insights from Business Monitor suggest the coalbed methane (CBM) industry in India could be at risk from low gas prices and infrastructure bottlenecks.
Despite rich potential offered by CBM in meeting India’s supply needs, continued low domestic gas prices threaten to delay needed investment in the unconventional gas industry. Meanwhile, emerging midstream bottlenecks due to inadequate pipeline infrastructure could cap CBM production growth beyond 2018.
CBM in India’s gas sector
A key player in the Indian CBM industry is Essar Oil, which spud the first well in a 100-well, 12-month drilling programme at the Raniganj East CBM block in West Bengal. In September, production from the block stood at 0.22 million m3/day – working out at 79.60 million m3/year. The current drilling programme aims to increase output to 1.19 million m3/day by March 2015 and 2.49 million m3/day by March 2016, bringing production to almost 1 billionn m3/year.
According to Business Monitor’s forecast for 2016 gas production, this CBM production will only contribute a marginal amount. However, Business Monitor maintains that CBM holds significant production growth potential.
India boasts vast CBM reserves, estimated at around 2.60 trillion m3. The government has pushed development of these resources in an attempt to offset production declines at major conventional fields. Production growth in India is severely lagging the growth in consumption, and the country has grown increasingly import dependent. From an estimated 21.07 billion m3 in 2013, a rapid rise in gas imports has been forecast to reach 56.33 billion m3 by 2023.
In terms of unconventionals, Business Monitor holds a strong bias towards CBM above shale in the company’s forecast. Estimated recoverable shale gas resources, although considerable, are around 1 trillion m3 smaller than those for CBM. There are also major barriers to shale gas extraction, such as the depth of shale gas deposits, as well as much of the gas being found in populated areas. The shale gas sector in India is also significantly less advanced than CBM, with a number of licensing and regulatory hurdles barring progress.
Make or break
For CBM, Business Monitor highlights three factors that will make or break production growth – the sustainability of production, domestic gas prices, as well as the development of midstream infrastructure.
Sustaining production is a key challenge. Due to their geological make-up, CBM formations can offer highly variable production and two wells drilled in close proximity can see radically different productivity rates. Indian coal is also of a relatively low grade. Because of this, its lower porosity and permeability can be a challenge to production. Pilot projects in general have returned relatively positive results, but on a very small scale. Raniganj East will provide an important litmus test, for the viability of larger block developments.
Domestic gas pricing is also a major factor. Previously, CBM producers were exempted from the domestic price cap and companies, such as Essar, were reportedly charging between US$ 5.10 – 22.80/million BTU. As of 2014, CBM has to be priced in line with conventional gas; which is sold at a rate of US$ 4.20/million BTU, although this is under review. Business Monitor estimates that a revised gas price of around US$ 8.00/million BTU would support the bulk of CBM developments, but a price lower than US$ 6.00/million BTU would see many projects become unprofitable. The Indian cabinet has announced that a decision will be made on 15 November, although there is high probability of further delay, according to Business Monitor.
In terms of longer-term production growth, midstream infrastructure poses the biggest constraint. India’s Petroleum and Natural Gas Regulatory Board (PNGRB) has projected a doubling of transmission and distribution infrastructure by 2017, from 337 million m3/day, to 721 million m3/day, to support the increase in domestic production. However, pipeline construction is reportedly only 17% complete. The 2050 km Jagdishpur-Haldia pipeline, which was to connect gas from a number of fields in West Bengal – including Raniganj East – to consumers in West Bengal, Uttar Pradesh, Jharkhand and Bihar was scheduled for completion in March 2014. However, the project has struggled to find anchor investors, and construction is yet to begin. Modi has committed to drive progress on these key infrastructure projects. However, in the absence of a substantial increase in gas pipeline capacity, Business Monitor forecasts a major midstream bottleneck on production emerging beyond 2018.
The potential offered by CBM in meeting India’s gas demand is clear, however, also clear are the challenges facing the development of this relatively young industry. If the challenges are met and overcome, India can benefit from a prosperous CBM sector. It must act to ensure this is the case.
Edited by Sam Dodson